# Roadmap for the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards by U.S. Issuers > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3AE8-27559 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** November 21, 2008 - **Citation:** 73 FR 70816 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 229, 230, 240, 244 and 249 [Release Nos. 33-8982; 34-58960; File No. S7-27-08] RIN 3235-AJ93 Roadmap for the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards by U.S. Issuers AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing a Roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board by U.S. issuers for purposes of their filings with the Commission. This Roadmap sets forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014 if the Commission believes it to be in the public interest and for the protection of investors. This Roadmap also includes discussion of various areas of consideration for market participants related to the eventual use of IFRS in the United States. As part of the Roadmap, the Commission is proposing amendments to various regulations, rules and forms that would permit early use of IFRS by a limited number of U.S. issuers where this would enhance the comparability of financial information to investors. Only an issuer whose industry uses IFRS as the basis of financial reporting more than any other set of standards would be eligible to elect to use IFRS, beginning with filings in 2010. DATES: Comments should be received on or before February 19, 2009. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use of the Commission's Internet comment form ( http://www.sec.gov/rules/proposed.shtml ); or • Send an e-mail to rule-comments@sec.gov. Please include File Number S7-27-08 on the subject line; or • Use the Federal Rulemaking ePortal ( http://www.regulations.gov ). Follow the instructions for submitting comments. Paper Comments • Send paper comments in triplicate to Florence E. Harmon, Acting Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-27-08. The file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/proposed/shtml ). Comments also are available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Craig Olinger, Deputy Chief Accountant, Division of Corporation Finance, at (202) 551-3400 or Michael D. Coco, Special Counsel, Office of International Corporate Finance, Division of Corporation Finance, at (202) 551-3450, or Liza McAndrew Moberg, Professional Accounting Fellow, Office of the Chief Accountant, at (202) 551-5300, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628. SUPPLEMENTARY INFORMATION: The Commission is publishing for comment a proposed Roadmap and proposed amendments to Regulations S-X, 1 S-K 2 and C 3 under the Securities Act of 1933 (the “Securities Act”), 4 and Rule 12b-2, 5 Schedule 13E-3, 6 Schedule TO, 7 Regulation G, 8 and Form 8-K, 9 under the Securities Exchange Act of 1934 (the “Exchange Act”). 10 In Regulation S-X, we propose to amend Rules 1-01, 11 1-02, 12 3-10, 13 4-01 14 and 8-01, 15 and to add Article 13. We are proposing the new Article 13 to apply to U.S. issuers and, as a conforming change, to foreign private issuers 16 that file IFRS financial statements. 17 In Regulation S-K, we propose to amend Items 10, 18 101, 19 301, 20 504, 21 1100, 22 1112, 23 1114 24 and 1115. 25 In Regulation C, we propose to amend Rule 405. 26 In Regulation G, we propose to amend Item 101. 27 1 17 CFR 210.1-01-210.12-29. Regulation S-X sets forth the form and content of requirements for financial statements. 2 17 CFR 229.10 et seq. 3 17 CFR 230.400 et seq. 4 15 U.S.C. 77a et seq. 5 17 CFR 240.12b-2. 6 17 CFR 240.13e-100. 7 17 CFR 240.14d-100. 8 17 CFR 244 et seq. 9 17 CFR 249.308. 10 15 U.S.C. 78a et seq. 11 17 CFR 210.1-01. 12 17 CFR 210.1-02. 13 17 CFR 210.3-10. 14 17 CFR 210.4-01. 15 17 CFR 210.8-01. 16 A “foreign private issuer,” as defined in Rule 3b-4(c) [17 CFR 240.3b-4(c)], means any foreign issuer other than a foreign government except an issuer that meets the following conditions: (1) More than 50 percent of the issuer's outstanding voting securities are directly or indirectly held of record by residents of the United States; and (2) any of the following: (i) the majority of the executive officers or directors are United States citizens or residents; (ii) more than 50 percent of the assets of the issuer are located in the United States; or (iii) the business of the issuer is administered principally in the United States. 17 As explained in Section V.B. below, inclusion of foreign private issuers in Article 13 will not change the content of their financial statements filed under Form 20-F. 18 17 CFR 229.10. 19 17 CFR 229.101. 20 17 CFR 229.301. 21 17 CFR 229.504. 22 17 CFR 229.1100. 23 17 CFR 229.1112. 24 17 CFR 229.1114. 25 17 CFR 229.1115. 26 17 CFR 230.405. 27 17 CFR 244.101. Table of Contents I. Overview II. The Role of IFRS in the U.S. Capital Markets A. The Promise of Global Accounting Standards 1. The Global Nature of Today's Capital Markets 2. Potential for IFRS as the Global Accounting Standard B. Past Policy Considerations Regarding IFRS III. A Proposed Roadmap to IFRS Reporting by U.S. Issuers A. Milestones To Be Achieved Leading to the Use of IFRS by U.S. Issuers 1. Improvements in Accounting Standards 2. Accountability and Funding of the IASC Foundation 3. Improvement in the Ability To Use Interactive Data for IFRS Reporting 4. Education and Training 5. Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors 6. Anticipated Timing of Future Rulemaking by the Commission 7. Implementation of the Mandatory Use of IFRS B. Other Areas of Consideration 1. The Roles of Financial Information 2. Accounting Systems, Controls and Procedures 3. Auditing 4. Considerations of IFRS and the IASB's Standard Setting Process a. State of IFRS b. Relationship to the Accounting Standard Setting Process IV. Proposal for the Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors A. Eligibility Requirements B. Staff Letter of No Objection to the Use of IFRS C. Transition D. Alternative Proposals for U.S. GAAP Information 1. Proposal A—Reconciled Information Pursuant to IFRS 1 2. Proposal B—Supplemental U.S. GAAP Information 3. Discussion of Proposals A and B V. Discussion of Proposed Amendments A. The Use of IFRS Financial Statements in Commission Filings by Eligible Issuers 1. Proposed Amendments to Rule 4-01 of Regulation S-X 2. Proposed Definition of “IFRS Issuer” B. Application 1. Article 13 of Regulation S-X 2. Proposed Clarifying Amendments With Respect to References to IFRS as Issued by the IASB C. Proposed Amendments to Item 10(e) of Regulation S-K and Regulation G D. Related Disclosure and Financial Reporting Issues 1. Selected Financial Data 2. Market-Risk and the Safe Harbor Provisions 3. Disclosure of First-Time Adoption of IFRS in Form 10-K 4. Other Considerations Relating to IFRS and U.S. GAAP Guidance E. Financial Statements of Other Entities Under Regulation S-X 1. Application of the Amendments to Rules 3-05, 3-09 and 3-14 a. Significance Testing b. Separate Historical Financial Statements of Another Entity Provided Under Rule 3-05, 3-09 or 3-14 2. Financial Statements Provided Under Rule 3-10 3. Financial Statements Provided Under Rule 3-16 F. Pro Forma Financial Statements Provided Under Article 11 G. Industry Specific Matters 1. Disclosure Pursuant to Industry Guides 2. Disclosure From Oil and Gas Companies Under FAS 69 H. Application of the Proposed Amendments to Other Forms, Rules and Schedules 1. Application of Proposed Amendments to Exempt Offerings 2. References to FASB Pronouncements in Form 8-K 3. Application of IFRS to Tender Offer and Going-Private Rules VI. General Request for Comments VII. Paperwork Reduction Act A. Background B. Burden and Cost Estimates Related to the Proposed Amendments C. Request for Comment VIII. Cost-Benefit Analysis A. Proposal for Early Use of IFRS by U.S. Issuers 1. Expected Benefits 2. Expected Costs B. Proposal A: Reconciled Information Pursuant to IFRS 1 1. Expected Benefits 2. Expected Costs C. Proposal B: Supplemental U.S. GAAP Information 1. Expected Benefits 2. Expected Costs IX. Regulatory Flexibility Act Certification X. Consideration of Impact on the Economy, Burden on Competition and Promotion of Efficiency, Competition and Capital Formation XI. Proposed Amendments to the Codification of Financial Reporting Policies XII. Statutory Basis and Text of Proposed Amendments I. Overview The Commission is proposing this Roadmap towards requiring the use of International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) 28 by U.S. issuers 29 as part of its consideration of the role a single set of high-quality accounting standards plays in investor protection and the efficiency and effectiveness of capital formation and allocation. As capital markets have become increasingly global, U.S. investors have a corresponding increase in international investment opportunities. In this environment, we believe that U.S. investors would benefit from an enhanced ability to compare financial information of U.S. companies with that of non-U.S. companies. The Commission has long expressed its support for a single set of high-quality global accounting standards as an important means of enhancing this comparability. 30 We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information. 28 As used in this release, the phrase “IFRS as issued by the IASB” refers to the authoritative text of IFRS, which, according to the Constitution of the International Accounting Standards Committee Foundation (“IASC Foundation”), is published in English. See “International Financial Reporting Standards, including International Accounting Standards and Interpretations as at 1 January 2007,” Preface to International Financial Reporting Standards, at paragraph 23. Unless otherwise noted, the phrase “IFRS” refers to IFRS as issued by the IASB. 29 The terms “U.S. issuer” and “domestic issuer” are used interchangeably in this release. Although there is no specific definition of those terms under the Exchange Act or the Securities Act, they are used in this document to refer to any issuer that files annual reports pursuant to the Exchange Act on Form 10-K [17 CFR 249.310] or a registration statement under the Securities Act for which foreign private issuer status is not an eligibility requirement. For purposes of this release, the terms U.S. issuer and domestic issuer also include a foreign issuer or foreign private issuer, as defined in Rule 3b-4 under the Exchange Act [17 CFR 240.3b-4(c)] and in Rule 405 under the Securities Act [17 CFR 230.405], that elects to file on domestic forms. 30 See, for example, Release No. 33-6807 (November 14, 1988) [53 FR 46963 (November 21, 1988)]. This proposed Roadmap first addresses the basis for considering the mandatory use of IFRS by U.S. issuers. It then sets forth seven milestones which, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission. 31 The Commission in 2011 would determine whether to proceed with rulemaking to require that U.S. issuers use IFRS beginning in 2014 if it is in the public interest and for the protection of investors to do so. These milestones relate to: 31 This release does not address the method the Commission would use to mandate IFRS for U.S. issuers. One of the options would be for the Financial Accounting Standards Board (“FASB”) to continue to be the designated standard setter for purposes of establishing the financial reporting standards in issuer filings with the Commission. In this option our presumption would be that the FASB would incorporate all provisions under IFRS, and all future changes to IFRS, directly into generally accepted accounting principles as used in the United States (“U.S. GAAP”). This type of approach has been adopted by a significant number of other jurisdictions when they adopted IFRS as the basis of financial reporting in their capital markets. • Improvements in accounting standards; • The accountability and funding of the IASC Foundation; • The improvement in the ability to use interactive data for IFRS reporting; • Education and training relating to IFRS; • Limited early use of IFRS where this would enhance comparability for U.S. investors; • The anticipated timing of future rulemaking by the Commission; and • The implementation of the mandatory use of IFRS by U.S. issuers. After describing the milestones, this proposed Roadmap also discusses how IFRS reporting by U.S. issuers may affect other participants in the capital markets. As a step along this Roadmap, this release then describes proposed amendments to permit a U.S. issuer that is among the largest companies worldwide within its industry, and whose industry uses IFRS as the basis of financial reporting more than any other set of standards, to elect to use IFRS beginning with filings for fiscal years ending on or after December 15, 2009. These amendments include a process by which U.S. issuers would seek confirmation from Commission staff that they are eligible to use IFRS in their Commission filings. This release also seeks comment on two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information. II. The Role of IFRS in the U.S. Capital Markets A. The Promise of Global Accounting Standards 1. The Global Nature of Today's Capital Markets Today, investors, issuers and other capital markets participants are able to engage in financial transactions across national boundaries and to make investment, capital allocation and financing decisions on a global basis more readily than ever before. This is due in large measure to today's ever-faster communications, and ever-more-closely linked markets. Advances in technology that facilitate securities transactions have reduced barriers that previously existed and that may have impeded cross-border investment for both retail and institutional investors. For instance, investors can more readily obtain information on a wide variety of international investment opportunities than in the past, largely due to the availability of information over the Internet. Further, it is now possible for U.S. investors to have access to real-time securities transaction data from stock exchanges and other securities markets from around the world and to trade on global exchanges through accounts they manage over the Internet. As trading and investment become more global, investors face an increasing need for full, fair and reliable disclosure that enables comparison of financial information across investment alternatives that cross national boundaries. A large and increasing number of U.S. investors hold securities of non-U.S. issuers. Further, U.S. investors have the ability to make cross-border investments readily. 32 Thus, we believe it is important for U.S. investors to have access to the tools to compare effectively and efficiently their investment opportunities in a global capital market. The Commission has long considered a reduction in the disparity between the accounting and disclosure practices of the United States and those of other countries as an important objective for both the protection of investors and the efficiency of capital markets. 33 Further, while our recent Advisory Committee on Improvements to Financial Reporting (“CIFiR”) purposefully limited its scope relating to international matters due to ongoing efforts by the Commission and the FASB, it did similarly note the following in its final report to the Commission. 34 32 Over the period from 1990 to 2006, estimated investments in foreign equity securities held by U.S. residents has grown from approximately $200 billion to $4,300 billion, based on estimates published by the U.S. Bureau of Economic Analysis, U.S. Treasury statistics. See http://bea.gov/international/xls/intinv07_t2.xls . Included in this category are investments in equities, whether listed or unlisted, where the holding by the U.S. resident is less than 10%. 33 See, for example, Release No. 33-6360 (November 20, 1981) [46 FR 58511 (December 2, 1981)]. For a further discussion of the Commission's previous actions promoting development of a single set of high-quality globally accepted accounting standards, see Section III.C. of Release No. 33-8831 (August 7, 2007) [72 FR 45600 (August 14, 2007)] (“2007 Concept Release”). 34 See Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission (August 1, 2008) (“CIFiR Final Report”). We broadly support the continued move to a single set of high-quality global accounting standards, coupled with enhanced international coordination to foster their consistent interpretation and to avoid jurisdictional variants. Further, we encourage the development of a roadmap to identify issues and milestones to transition to this end state in the U.S., with sufficient time to minimize disruptions, resource constraints, and the complexity arising from such a significant change. 35 35 CIFiR Final Report, at page 21 (footnotes references omitted). The Commission recognizes that the use of a single, widely accepted set of high-quality accounting standards would benefit both the global capital markets and U.S. investors by providing a common basis for investors, issuers and others to evaluate investment opportunities and prospects in different jurisdictions. U.S. investors would be able to make better-informed investment decisions if they were to obtain high-quality financial information from U.S. companies that is more comparable to the presently available information from non-U.S. companies operating in the same industry or line of business. Capital formation and investor understanding would be enhanced if the world's major capital markets all operated under a single set of high-quality accounting standards that elicit comparable, high-quality financial information from public companies. 2. Potential for IFRS as the Global Accounting Standard The increasing acceptance and use of IFRS in major capital markets throughout the world over the past several years, and its anticipated use in other countries in the near future, indicate that IFRS has the potential to become the set of accounting standards that best provide a common platform on which companies can report and investors can compare financial information. Approximately 113 countries around the world currently require or permit IFRS reporting for domestic, listed companies. 36 36 Some countries have enacted IFRS as national standards and require compliance to be stated with those national standards. In some cases, these national standards are identical to IFRS as issued by the IASB; in other cases, these national standards have been more narrow, yet consistent with IFRS as issued by the IASB; and, in yet other cases, these national standards may permit additional options that are inconsistent with IFRS as issued by the IASB, although companies may opt to apply standards so that they comply with IFRS as issued by the IASB. See http://www.iasplus.com/country/useias.htm. Foreign jurisdictions have chosen to require or allow IFRS for many different reasons. For example, in the European Union (the “E.U.”), prior to its requirement relating to IFRS applicable to companies incorporated and publicly traded in its Member States, 37 accounting standards in each of the E.U. Member States generally were established individually in each jurisdiction. Further, each Member State would typically permit the use in its capital markets of accounting standards set in other jurisdictions, in addition to its own domestic accounting standards. 38 IFRS provided a common set of accounting principles under which all domestic listings in the E.U. could report. In Canada, accounting standard setters concluded that, given the increasing globalization of capital markets and other recent developments, that it was timely for public Canadian companies to adopt globally accepted, high-quality accounting standards by converging Canadian GAAP with IFRS over a transitional period, after which a separate and distinct Canadian GAAP would cease to exist as a basis of financial reporting for public companies. 39 In Australia, the decision to adopt IFRS was part of a strategy to ensure consistency and comparability of Australian financial reporting with financial reporting across global financial markets. 40 More countries have adopted IFRS, including Israel, 41 and others have plans to allow it, including Brazil. 42 The market capitalization of exchange listed companies in the E.U., Australia and Israel totals $11 trillion (or approximately 26% of global market capitalization), and the market capitalization from those countries plus Brazil and Canada totals $13.4 trillion (or approximately 31% of global market capitalization). 43 37 See Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of the European Union of 19 July 2002 on the application of international accounting standards, Official Journal L. 243, 11/09/2002 P. 0001-0004. 38 For example, U.S. GAAP was accepted by some E.U. Member States for domestic registrants and still is accepted for foreign registrants. 39 For additional information, see http://www.cica.ca/index.cfm/ci_id/44036/la_id/1.htm. The staff of the Canadian Securitities Administrators (“CSA”) has proposed retaining the existing option for a domestic Canadian issuer that is also an SEC issuer to use U.S. GAAP. See http://www.cica.ca/3/9/1/6/6/index1.shtml. for the link to “CSA Announcement re: IFRS in Canada” (CSA Staff Notice 52-321). 40 See http://www.asic.gov.au/asic/asic.nsf/byheadline/Your+questions+about+implementing+the+IFRS?openDocument#1. 41 See Israel Accounting Standard No. 29 “Adoption of International Financial Reporting Standards,” which describes the adoption of IFRS in Israel for years starting on January 1, 2008. 42 See http://www.cvm.gov.br/port/snc/inst457.pdf. 43 All figures are from the World Federation of Stock Exchanges, Domestic Market Capitalization as of September 30, 2008, in U.S. dollars. The Commission is aware of the transitions made by other countries to IFRS. For example, the vast majority of listed European companies, including banks and insurance companies, moved to comply with the E.U. IFRS requirement in 2005 with the remainder transitioning in 2007. Under these transition approaches, in essence all or almost all of the listed companies transitioned to IFRS at the same time. Some foreign regulators have published reports relating to the implementation of IFRS in their country. For example, the U.K. Financial Reporting Review Panel and the Autorité des Marchés Financiers of France (“AMF”) have both published reports making observations on IFRS as applied in their jurisdictions. 44 44 For the report of the U.K. Financial Reporting Review Panel, see “Preliminary Report: IFRS Implementation” available at http://www.frc.org.uk/images/uploaded/documents/IFRS%20Implementation%20-%20preliminary.pdf. For the report of the AMF, see “Recommendations on accounting information reported in financial statements for 2006,” dated December 19, 2006, available at http://www.amf-france.org/documents/general/7565_1.pdf . As with all countries that have evaluated the potential use of IFRS in their own markets, the policy considerations in the United States must factor in the individual circumstances of its investors and capital markets. The U.S. capital markets are among the largest and most liquid in the world. U.S. GAAP is a well-established basis of financial reporting and is applied by all U.S. public companies, many foreign companies, and many U.S. private companies, as well as their auditors. Today, U.S. GAAP is accepted in capital markets around the world, and the Commission requires its use by all domestic issuers. 45 The accounting principles established by the FASB have been recognized by the Commission as “generally accepted” for purposes of the U.S. federal securities laws. 46 45 See Rule 4-01(a)(1) of Regulation S-X [17 CFR 210.4-01(a)(1)]. 46 See Release No. 33-8221, Financial Reporting Release (“FR”) 70 (April 25, 2003) [68 FR 23333 (May 1, 2003)] (“FR 70”). Regardless of whether the Commission decides to allow or require IFRS for U.S. issuers in the future, the past and anticipated move towards the use of IFRS in other jurisdictions may have begun to affect U.S. investors' ability to evaluate investment alternatives as their level of investment in non-U.S. companies has increased over time. 47 The growing level of foreign investment by U.S. residents in international investment opportunities, including opportunities to invest in issuers that do not file reports with the Commission, makes it likely that U.S. investors will increasingly need to use IFRS financial statements. 48 Also, it is likely that large U.S. issuers that compete for capital on a global basis will increasingly need to use and understand IFRS financial statements in order to remain competitive. For these reasons, the Commission finds it advisable to continue to pursue consideration of the use of IFRS in the U.S. markets in order to better equip U.S. investors to make comparisons of U.S. companies with certain non-U.S. companies, while balancing this with the fact that U.S. investors should be able to compare U.S. companies with other U.S. companies. 47 As more companies move towards IFRS reporting, current and potential investors in U.S. issuers may increasingly be comparing those U.S. issuers' financial information to IFRS-based financial information of competing investment opportunities. For example, approximately 120 foreign private issuers currently report to the Commission using IFRS financial statements. 48 For example, U.S. investors may purchase securities issued by a non-reporting foreign company directly on a foreign exchange, or they may invest in American Depositary Receipts representing the securities of a foreign private issuer that is exempt from Exchange Act reporting requirements pursuant to Rule 12g3-2(b) [17 CFR 240.12g3-2(b)]. Promoting a single set of globally accepted accounting standards will benefit investors as more and more companies prepare their financial statements applying a single set of high-quality accounting standards. With a single set of accounting standards, investors can more easily compare information and will be in a better position to make informed investment decisions. This benefit is dependent upon use of a single set of high-quality standards globally and financial reporting that is, in fact, consistently applied across companies, industries and countries. Any decision we may take to expand the use of IFRS to U.S. issuers would necessitate our evaluation of whether global developments support the assertion of IFRS as the single set of high-quality globally accepted accounting standards that is applied consistently across companies, industries and countries. The Commission has identified certain considerations which may influence the degree to which comparability may be achieved through widespread adoption of IFRS. These considerations include the extent to which IFRS is adopted and applied globally, and whether IFRS is adopted and applied in foreign jurisdictions as issued by the IASB or as jurisdictional variants of IFRS. 49 We believe that the benefits of moving towards a single set of globally accepted standards as a long-term objective for increased comparability of financial statements are attainable through the use of IFRS only if IFRS represents a single set of high-quality accounting standards, which is best accomplished through the use of IFRS as issued by the IASB. As stated previously, each jurisdiction's considerations surrounding the use of IFRS in its markets are unique to the jurisdiction's circumstances. Therefore, the large number of countries allowing or requiring IFRS in their markets does not alone determine the Commission's decision. However, in determining whether to proceed with requiring the use of IFRS by U.S. issuers, the Commission will consider the extent to which IFRS as issued by the IASB is used globally, is applied consistently, and supports the assertion of IFRS as the single set of high-quality global accounting standards. 50 49 Different jurisdictions often have internal processes through which they adopt or incorporate IFRS into their national accounting standards. Decisions made during those processes may result in discrepancies from IFRS as issued by the IASB. 50 In 2007, as part of our efforts to foster a single set of globally accepted accounting standards, we adopted amendments to allow foreign private issuers to file IFRS financial statements without reconciliation to U.S. GAAP only if the financial statements were prepared in accordance with IFRS as issued by the IASB. See “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S.,” Release No. 33-8879 (December 21, 2007) [73 FR 986 (January 4, 2008)] (the “2007 Adopting Release”). The Commission proposed these rules in June 2007 [Release No. 33-8818 (July 3, 2007)] [72 FR 37962 (July 11, 2007)] (the “2007 Proposing Release”). B. Past Policy Considerations Regarding IFRS Over time, the Commission has undertaken a series of initiatives to promote a single set of high-quality globally accepted accounting standards as a means of advancing the objective of reduced disparity in financial reporting between U.S. issuers and foreign issuers. Convergence of U.S. GAAP and IFRS as issued by the IASB, which involves the best efforts of the IASB and the FASB (referred to jointly as “the Boards”) to make their financial reporting standards fully compatible on a standard-by-standard basis, has been the predominant approach taken in the United States to achieve that objective over the past six years. 51 As discussed further below, the Commission continues to support the joint efforts of the IASB and the FASB as an important means of increasing the quality of IFRS and U.S. GAAP and, at the same time, reducing disparity between the two. 51 The Norwalk Agreement, issued in 2002, and a Memorandum of Understanding entered into by the FASB and the IASB in 2006 express the Boards' intentions to, on a best efforts basis, converge U.S. GAAP and IFRS. See http://www.fasb.org/news/memorandum.pdf and http://www.fasb.org/intl/mou_02-27-06.pdf for further details. More recently, the Commission's consideration of the use of IFRS by U.S. issuers has included the issuance of a Concept Release addressing whether U.S. issuers should be permitted, but not required, to use IFRS in their filings with the Commission. 52 Specifically, the Commission sought input on the nature and extent of the public's interest in giving U.S. issuers the option to file with the Commission financial statements prepared in accordance with IFRS as issued by the IASB. The Commission received over 80 comment letters from a wide range of issuers, investors, accounting firms and other market participants. 53 52 See 2007 Concept Release. 53 These comments are available at http://www.sec.gov/comments/s7-20-07/s72007.shtml. The Commission also has held three public roundtables consisting of investors, issuers, accounting firms, educators, standard setters and other capital market participants to receive further input about the use of IFRS. 54 In December 2007, the Commission held one roundtable on IFRS in U.S. markets and a second on practical issues surrounding the use of IFRS in recent years and its potential expanded use in future years. The third roundtable, in August 2008, related to the performance of U.S. GAAP and IFRS during the sub-prime crisis. 54 Information on these Roundtables, including transcripts, is available on the Commission's Web site at http://www.sec.gov/spotlight/ifrsroadmap.htm. While many commenters on the 2007 Concept Release and the participants at the roundtables supported allowing U.S. issuers to use IFRS, certain commenters expressed the belief that IFRS should be mandated for all U.S. issuers and not limited to a specific group of U.S. issuers. Other commenters believed that U.S. issuers should continue to use U.S. GAAP, while supporting ongoing convergence. III. A Proposed Roadmap to IFRS Reporting by U.S. Issuers A. Milestones To Be Achieved Leading to the Use of IFRS by U.S. Issuers The Commission is proposing this Roadmap to set forth milestones which, if achieved, could lead to the eventual use of IFRS by all U.S. issuers. Through this Roadmap, the Commission is seeking to realize the objective of providing investors with financial information from U.S. issuers under a set of high-quality globally accepted accounting standards, which would enable U.S. investors to better compare financial information of U.S. issuers and competing international investment opportunities. This Roadmap is further intended to encourage market participants to consider the effect of IFRS in our capital markets and to prepare for the use of IFRS financial statements by U.S. issuers in their filings with the Commission. In addition to the milestones, the Commission also expects to consider, among other things, whether IFRS as issued by the IASB is a globally accepted set of accounting standards and whether it is consistently applied. The advantages to U.S. investors of increased comparability across investment alternatives, as contemplated under this Roadmap, are dependent upon financial reporting under IFRS that is, in fact, consistent across companies, industries and countries. The course of action described in this proposed Roadmap reflects the deliberations of the Commission in light of current circumstances. We intend to publish the final Roadmap, if adopted, in our Codification of Financial Reporting Policies. 55 We recognize, however, that as events occur, new circumstances may require us to update or revise the Roadmap. With the knowledge of the anticipated timetable for Commission rulemaking initiatives on this policy matter, investors, issuers and other market participants may engage more concretely in discussions about IFRS for U.S. issuers, both through comments provided to the Commission as well as in further dialogue among parties potentially affected. The Commission believes that any future actions relating to the use of IFRS by U.S. issuers would benefit from the increased awareness by all affected parties of the related issues and preparedness that this Roadmap is intended to foster. As we progress along this initiative, we anticipate receiving extensive input from investors, issuers and other affected parties, which we will consider carefully. 55 See FR 1 (April 15, 1982), 7 Fed. Sec. L. Rep. (CCH) ¶ 72,401, at 62,021. This proposed Roadmap relates solely to U.S. issuers with respect to their periodic reporting requirements under Sections 13 and 15(d) of the Exchange Act, proxy and information statements under Section 14 of the Exchange Act and registration statements under Section 12 of the Exchange Act and Section 7 of the Securities Act. Our considerations at this time with respect to the possible use of IFRS do not include issuers that are investment companies under the Investment Company Act of 1940. Likewise, at this time, the Roadmap does not extend to other types of financial reports that are filed or furnished to the Commission by regulated entities, such as registered broker-dealers. 1. Improvements in Accounting Standards In October 2002, the FASB and the IASB announced the issuance of a memorandum of understanding, called the Norwalk Agreement. The two bodies acknowledged their joint commitment to the development, “as soon as practicable,” of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. At that time, the FASB and the IASB pledged to use their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable and to coordinate their future work programs to ensure that once achieved, compatibility is maintained. In a 2006 Memorandum of Understanding, the FASB and the IASB indicated that a common set of high-quality global standards remains the long-term strategic priority of both the FASB and the IASB. As part of this commitment, the IASB and the FASB set out a work plan covering several projects and coordinated agendas so that major projects that one board takes up may also be taken up by the other board. That plan covered specific long- and short-term projects for work into 2008. In November 2007, the Trustees of the IASC Foundation reiterated their support for continuing the work program described in these memoranda, noting that future work is largely focused on areas in which the objective is to develop new world-class international standards. The FASB and the IASB have updated the timetable for their joint work under the 2006 Memorandum of Understanding. 56 The next phase of the joint work plan goes through 2011. 56 See the update to the 2006 Memorandum of Understanding at http://www.fasb.org/intl/MOU_09-11-08.pdf . The current joint work plans of the two standard setters, as well as other work undertaken by them, furthers the goal of comprehensive, high-quality standards. The Commission will continue to monitor the activities of both the FASB and the IASB and the progress of their efforts. In past Commission releases, we have noted areas where IFRS provides limited guidance on a particular topic, such as accounting for insurance contracts and for extractive activities. 57 Further, the current work plan of the FASB and the IASB includes accounting standards, including (without emphasizing priority) revenue recognition and financial statement presentation, that when completed should improve financial reporting significantly. The Commission will consider the degree of progress made by the FASB and the IASB in any future evaluation of the potential expanded role of IFRS in the reporting by U.S. issuers. When the Commission considers mandating use of IFRS by U.S. issuers in 2011, it would consider whether those accounting standards are of high quality and sufficiently comprehensive. 58 The Commission urges the two Boards to continue working towards the completion of their joint work plan estimated to be completed in 2011 and other projects that are expected to improve financial reporting. 57 See the discussion in Section III.B.4, below. 58 High quality accounting standards consist of a set of neutral principles that require consistent, comparable, relevant and reliable information that is useful for investors. See “SEC Concept Release: International Accounting Standards,” Release No. 33-7801 (February 16, 2000) [65 FR 8896 (February 23, 2000)]. In addition, it is important that accounting standards be established under a robust, independent process that includes careful consideration of possible alternative approaches and due process, which allows for input from and consideration of views expressed by affected parties, including investors. It is also important that accounting standards are promptly considered to keep standards current and reflect emerging accounting issues and changing business practices. Further, it is important that the accounting standards produced are capable of improving the accuracy and effectiveness of financial reporting and the protection of investors, and of resulting in a high quality of financial reporting relative to the standards which may be replaced. Thus, in considering future action as set out in this Roadmap, the Commission would also assess whether it believes that the IASB continues to develop its standards, including converged standards, through a process that reflects these elements. 2. Accountability and Funding of the IASC Foundation The IASB is based in London and is an accounting standard setting body established to develop global standards for financial reporting. 59 It is overseen by the IASC Foundation. The IASC Foundation is based in London and is a stand-alone, not-for profit organization, incorporated in Delaware. It is responsible for the activities of the IASB and other work that centers on IFRS, such as initiatives related to translation of IFRS from the English language, education about IFRS and the development of interactive data taxonomies for IFRS. The IASC Foundation is governed by 22 trustees (“IASC Foundation Trustees”) whose backgrounds are geographically diverse. 59 For more information on the structure and operation of the IASB, see http://www.iasb.org. The IASC Foundation has financed IASB operations largely through voluntary contributions from a wide range of market participants from across the world's capital markets, including from a number of firms in the accounting profession, companies, international organizations, central banks and governments. Funding commitments were made for the period 2001-2005 and then were extended for an additional two years through 2007. In June 2006, the IASC Foundation Trustees agreed on four elements that should govern the establishment of a funding approach designed to enable the IASC Foundation to remain a private-sector organization with the necessary resources to conduct its work in a timely fashion. The IASC Foundation Trustees determined that characteristics of the new scheme for 2008 would be broad-based, compelling, open-ended and country-specific. 60 The IASC Foundation Trustees continue to make progress in obtaining funding that satisfies those elements. 61 60 Further description of these elements can be found on the IASB's Web site at http://www.iasb.org/About+Us/About+the+IASC+Foundation/Funding.htm. The IASC Foundation describes these principles as follows: • Broad-based: A sustainable long-term financing system must expand the base of support to include major participants in the world's capital markets, including official institutions, in order to ensure diversification of sources. • Compelling: A system must carry with it enough pressure to make free riding very difficult. This could be accomplished through a variety of means, including official support from the relevant regulatory authorities and formal approval by the collecting organizations. • Open-ended: The financial commitments should be open-ended and not contingent on any particular action that would infringe on the independence of the IASC Foundation and the IASB. This should include sustained support from official international organizations, central banks and the major accounting firms. • Country-specific: The funding burden should be shared by the major economies of the world on a proportionate basis, using GDP as the key determining factor of measurement. Each country should meet its designated target in a manner consistent with the principles above. Trustees should be assigned to specific countries to assist in the development of the funding scheme. 61 See http://www.iasb.org/About+Us/About+the+IASC+Foundation/2008+funding+commitments.htm. The Commission will carefully consider the degree to which the IASC Foundation has a secure, stable funding mechanism that permits it to function independently and that enhances the IASB's standard setting process. The IASC Foundation has developed targeted contribution levels from individual jurisdictions. Realizing the IASC Foundation's goal of receiving open-ended funding commitments from a broad base of constituents and that are compulsory would encourage the independent functioning of the IASB in its standard setting process. Otherwise, the IASB may be subject to a perceived or, potentially, an actual connection between the availability of funding and the outcome of its standard setting process. We believe that our future determination regarding the required use of IFRS for all U.S. issuers should only occur after the IASC Foundation reaches its goal of securing a stable funding mechanism that supports the independent functioning of the IASB. National accounting standard setters traditionally have been accountable to a national securities regulator or other government authority. In the United States, the Financial Accounting Foundation (“FAF”), the parent of the FASB, is overseen by the Commission. The IASC Foundation has not historically had a similar link with any national securities regulators. Recognizing that such a relationship would enhance the public accountability of the IASC Foundation, its Trustees have proposed amendments to its Constitution to establish a connection between the IASC Foundation and a Monitoring Group composed of securities authorities charged with the adoption or recognition of accounting standards used in their respective jurisdictions. 62 The Commission has been working with other national securities authorities and the International Organization of Securities Commissions to establish the Monitoring Group to enable it to begin its work once the IASC Foundation adopts the necessary changes to its Constitution. 63 The securities authorities, including the Commission, envision that the Monitoring Group will participate in and approve nominations for IASC Foundation Trustees, review the funding arrangements of the IASC Foundation for adequacy and appropriateness, and address matters that the IASC Foundation Trustees are responsible for, such as oversight of the IASB and potential areas for consideration by the IASB in its ongoing work. 64 62 See http://www.iasb.org/NR/rdonlyres/12CC476D-B88F-418A-826F-71A7465FC2E0/0/ Proposal_and_issues_for_the_Constitution.pdf for a full description of the proposed amendments to the Constitution. 63 See the Commission's joint statement with other national securities regulators with respect to the establishment of a Monitoring Group at http://www.sec.gov/news/press/2007/2007-226.htm . 64 The proposed responsibilities of the Monitoring Group do not extend to the standard setting process. The Commission believes that the accountability of the IASC Foundation will be enhanced once the Monitoring Group provides the forum for interaction between securities authorities and the IASC Foundation Trustees. The Commission believes that effective oversight is critical to mandating that U.S. issuers prepare financial statements in accordance with IFRS. Based on the progress of the discussions among securities regulators, as well as the IASC Foundation's timetable for adopting the relevant changes to its Constitution, the Commission assumes that the Monitoring Group will have been established and be functioning by the time the Commission considers mandating the use of IFRS for U.S. issuers. We will evaluate the effectiveness of the oversight mechanism (including the functioning of the multilateral nature of the Monitoring Group) in making the determination whether mandating IFRS is in the public interest for the protection of investors and our markets. 3. Improvement in the Ability To Use Interactive Data for IFRS Reporting In May 2008, the Commission proposed rules to require companies to provide their financial statements to the Commission and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (“XBRL”) in order to improve their usefulness to investors. 65 Under those proposed rules, financial statement information could be submitted by public companies in interactive data format, and that financial information could then be downloaded directly into spreadsheets, analyzed in a variety of ways using off-the-shelf commercial software, or used within investment models in any of a number of other software formats. The rules proposed in May, if adopted, would apply to domestic and foreign public companies that prepare their financial statements in accordance with U.S. GAAP, and foreign private issuers that prepare their financial statements using IFRS as issued by the IASB. Under the proposal, foreign private issuers that prepare their financial statements using IFRS as issued by the IASB would be required to provide financial statements in interactive data format starting with their fiscal periods ending on or after December 15, 2010. If the Commission adopts its proposed rules relating to interactive data, it is anticipated that they would apply to the limited number of U.S. issuers that could elect to file IFRS financial statements as proposed in this release. 65 See “Interactive Data to Improve Financial Reporting,” Release No. 33-8924 (May 30, 2008) [73 FR 32794 (June 10, 2008)]. In order to realize the improvements in the usefulness and comparability of financial information anticipated upon the widespread use of interactive data, U.S. issuers would have to be capable of providing IFRS financial statements to the Commission in interactive data format at a greater level of detail than is currently available. Therefore, the state of development of an IFRS list of tags for interactive data reporting will be a consideration in the Commission's determination of whether to require the use of IFRS for all U.S. issuers. The IASC Foundation first published a complete list of tags for the IFRS “Bound Volume” in 2004, and has published annual updates since then to reflect new pronouncements, changes in XBRL technical standards, and other improvements; the most recent such update was published in July 2008. The Commission staff is actively involved in the improvement and monitoring of the IFRS list of tags via participation in the IASC Foundation's XBRL Advisory Council. The Commission believes it is appropriate to consider the IASC Foundation's progress in the development of IFRS taxonomies prior to proceeding with rulemaking on IFRS for all U.S. issuers. 4. Education and Training Reporting in accordance with IFRS by U.S. issuers would increase the need for effective training and education about IFRS for investors, accountants, auditors and others involved in the preparation and use of financial statements, as there are differences between U.S. GAAP and IFRS. 66 Investor education is particularly important, so that users of financial statements can work with the financial information issuers publish. The main benefits to investors of a single set of high-quality globally accepted accounting standards would be realized only if investors more fully understood the basis for the reported results. In addition to investors, other financial statement users may include customers, vendors, rating agencies and analysts. 66 See , as just one example, http://www.kpmgifrsinstitute.com/documents/IFRS/721200810043IFRS%20compared%20to%20U.S.%20GAAP%20An%20Overview%20(2008).pdf. The education and ongoing training of most accountants in the United States is limited to or predominantly focused on the current provisions of U.S. GAAP. Consequently, many parties would likely need to undertake comprehensive education on IFRS. The need for IFRS training would involve personnel of issuers, their governing bodies, such as audit committees, and their auditors. Such requirements for training also extend to specialists, such as actuaries and valuation experts, since these professionals are engaged by management to assist in measuring certain assets and liabilities, and likely are not currently proficient in IFRS. Professional associations and industry groups would need to integrate IFRS into their training materials, publications, testing and certification programs. Colleges and universities would need to include IFRS in their curricula. 67 Furthermore, it would be appropriate to include IFRS in the Uniform CPA Examination. 68 67 IFRS supplements to and IFRS content in accounting textbooks used in U.S. universities have become increasingly available. 68 The Board of Examiners of the AICPA has issued an exposure draft, “Proposed Content and Skill Specifications for the Uniform CPA Examination” which proposed, among other things, inclusion of certain aspects of the IFRS conceptual framework and standard setting process in future Uniform CPA Examinations. Further, the proposal states that if IFRS becomes generally accepted in the United States, inclusion of those standards in the examination would expand. See http://www.cpa-exam.org/cpa/exposure_draft.html for the full text of the exposure draft. On the regulatory side, the Commission staff has continued to develop its familiarity with IFRS, and such efforts would need to continue and intensify if the Commission were to require U.S. issuers to file financial statements prepared in accordance with IFRS. The Public Company Accounting Oversight Board (“PCAOB”), as part of its inspection of registered public accounting firms, regularly reviews the audits of public companies. We understand the PCAOB has already begun to implement training courses in IFRS to assist its staff in carrying out inspections, but would need to expand these training programs. The strategies taken by those participants in markets where issuers already report in accordance with IFRS may serve as examples of approaches to increasing education and awareness of IFRS. The private sector may also respond to any increase in demand for education about IFRS by making educational materials available. Since the Commission's issuance of the Concept Release in August 2007, several of the largest accounting firms in the United States have increased the material made available to the public about IFRS generally as well as about the application of specific IFRS standards. For example, several of the accounting firms have held web casts accessible free of charge to the general public discussing different aspects of IFRS. The Commission would take into account the then current status of the overall education, training and readiness of investors, preparers, auditors and other parties involved in the preparation of financial statements prior to proceeding with rulemaking on IFRS for all U.S. issuers. 5. Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors This Roadmap contemplates that the Commission would make a decision in 2011 with regard to the mandated use of IFRS for U.S. issuers, as described below in Sections III.A.6. and 7. As part of this Roadmap, we also are proposing amendments to our rules, regulations and forms which, if adopted, would allow a limited number of U.S. issuers to file IFRS financial statements prior to any mandated use of IFRS in Commission filings. These proposed amendments are described later in this release. These proposed amendments would allow the limited early use of IFRS by U.S. issuers where it would enhance the comparability of financial reporting to U.S. investors for purposes of comparing the largest U.S. issuers with the largest non-U.S. companies in the same industry. Further, the Commission anticipates that providing the alternative to U.S. issuers to file IFRS financial statements would broaden the awareness and attention given to IFRS as a single set of high-quality globally accepted accounting standards. The Commission acknowledges the wide variety of opinion that has been expressed on this subject, including through comment letters received on the 2007 Concept Release and feedback received in the Commission's roundtables. Many commenters expressed the view that the option to use IFRS should be extended to all U.S. issuers. Others stated that we should require IFRS for all U.S. issuers. Several of these commenters indicated that any option to use IFRS should only be part of a transition to the mandatory use of IFRS. Others opposed the optional or mandatory use of IFRS at this time, and instead called for a continuation of the ongoing work to improve and converge U.S. GAAP and IFRS. Still others cited concerns in such areas as tax regimes, the stage of development of IFRS in certain areas in comparison to U.S. GAAP, the U.S. legal environment, and the ability of auditors to issue opinions on IFRS financial statements, as bearing on the questions of whether and how the use of IFRS should be extended to any U.S. issuers. We believe allowing the limited use of IFRS by U.S. issuers, only in those cases where to do so would enhance the comparability of an industry's financial reporting for the benefit of investors in making comparisons to non-U.S. issuers, may help inform the decision whether to mandate the use of IFRS for U.S. public issuers. We also believe that the ability of capital market participants to evaluate and comment on these questions would be enhanced by allowing this limited use of IFRS. We believe this is a prudent approach that will support and inform our consideration of the milestones in the proposed Roadmap as well as any future Commission action. We also are aware that the proposed amendments would permit some U.S. issuers to use IFRS financial statements while other U.S. issuers continue to use U.S. GAAP, thereby creating a dual system of financial reporting that has not existed previously for U.S. public companies. This would reduce the comparability among U.S. issuers and would require investor familiarity with both sets of accounting standards. If the Commission did not act on further milestones in this Roadmap, this dual system could continue and could increase if more issuers eligible to use IFRS elect to do so. To the extent a dual system of financial reporting develops in the United States for U.S. public companies, and this development affects the comparability of financial statements among U.S. public companies, this may create a need to reach a final resolution on the Roadmap. In order to increase the likelihood that the comparability between issuers would be enhanced, we therefore have limited the proposed option to use IFRS to a group of larger U.S. companies in industries in which IFRS is the most-used set of standards globally. 69 We believe that U.S. investors would benefit from an enhanced ability to compare investment opportunities. 69 Mindful that all U.S. issuers currently use U.S. GAAP in their Commission filings, we are also making alternative proposals for U.S. issuers that elect to use IFRS with respect to the disclosure of U.S. GAAP information, which should promote the continued comparability among U.S. issuers whether they use IFRS or U.S. GAAP in their primary financial statements. 6. Anticipated Timing of Future Rulemaking by the Commission After reviewing the status of the milestones and the study discussed below, the Commission would determine, in 2011, whether to proceed with rules requiring U.S. public companies to file financial statements prepared in accordance with IFRS by 2014 if it is in the public interest and promotes investor protection for us to do so. In order to assist the Commission in determining whether to proceed with such a rulemaking, the staff has already begun a comprehensive review of all Commission rules relating to financial reporting in order to recommend amendments that would fully implement IFRS reporting throughout the regulatory framework for registration and reporting under the Exchange Act and the Securities Act. 70 We believe that a Commission decision and action in 2011 would provide issuers with sufficient early notice of the transition to IFRS to permit them to begin their internal accounting using IFRS in 2012, which would be the earliest fiscal year that would be covered under the earliest anticipated phase-in for IFRS reporting in 2014, as described below in Section III.A.7. 70 The Commission also would evaluate the role of a private sector accounting standard setter, including the role of the FASB and how IFRS would be incorporated as mandatory accounting standards for U.S. issuers. We are proposing this Roadmap towards the mandatory, rather than elective, use of IFRS for U.S. issuers in order to promote fully a single set of high-quality globally accepted accounting standards to improve the comparability of financial information prepared by U.S. public companies and foreign companies. As described in Section I, IFRS is the basis of financial reporting used in a large and increasing number of countries worldwide. Because IFRS has the greatest potential to become the global standard of accounting, we believe it is in the interest of U.S. investors, U.S. issuers and U.S. markets to consider mandating reporting using IFRS in the United States as well. Additionally, we believe that over the long term the existence of dual accounting standards in the United States may create challenges in the U.S. capital markets, such as comparability for investors and other users of financial information and professional competence of auditors. We therefore are proposing this Roadmap towards the mandatory use of IFRS by U.S. issuers. If we decide to move forward with rulemaking for the use of IFRS by U.S. issuers, we expect to continue to require that issuers provide three years of audited annual IFRS financial statements. Currently, U.S. issuers are required to provide in their filings with the Commission three years of audited U.S. GAAP financial statements. 71 Because the initiative to require the use of IFRS by U.S. issuers relates to the set of accounting principles that is used for financial reporting and not to the periods for which financial reporting is required, the Commission expects that it would require three years of audited financial statements in the first year of IFRS reporting. 72 71 See Rule 3-02(a) of Regulation S-X [17 CFR 210.3-02(a)]. 72 To illustrate, if we require IFRS for the years ending on or after December 15, 2014, a calendar year company would report for the year ending December 31, 2014 using IFRS for the years ending December 31, 2012, 2013 and 2014. Many such companies would want to start IFRS internal accounting on January 1, 2012. However, during 2012, 2013 and the first three quarters of 2014, they would continue to be publicly reporting under existing U.S. GAAP. To assist the Commission in its decision to mandate the use of IFRS by U.S. issuers, the Commission directs the Office of the Chief Accountant with appropriate consultation with other Divisions and Offices to undertake a study and report to the Commission on the implications for investors and other market participants of the implementation of IFRS for U.S. issuers. We anticipate that the report would be made public by the Commission. 7. Implementation of the Mandatory Use of IFRS One means of implementing IFRS reporting by U.S. issuers that we are considering is a staged transition, as opposed to all U.S. issuers transitioning at once. Provisionally, under the transition, IFRS filings would begin for large accelerated filers for fiscal years ending on or after December 15, 2014. 73 Accelerated filers would begin IFRS filings for years ending on or after December 15, 2015. Non-accelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after December 15, 2016. In each instance, this would allow the filer to begin its books and records and internal accounting controls with respect to IFRS reporting for all three years of audited financial statements that would be required in its first year of IFRS reporting ( e.g. , 2012 to 2014 for large accelerated filers, 2013 to 2015 for accelerated filers, and 2014 to 2016 for non-accelerated filers). 73 The terms “large accelerated filer” and “accelerated filer” are defined in Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. Although the term “non-accelerated filer” is not defined in our rules, we use it in this release to refer to an Exchange Act reporting company that does not meet the Rule 12b-2 definition of either an “accelerated filer” or a “large accelerated filer.” We understand that a transition from one set of accounting standards to another, including changing the controls and systems relating to the production of financial statements, would involve costs. The definitions of accelerated filer and large accelerated filer under the Exchange Act reference the size of an issuer based on its worldwide public float of its equity securities. Our current expectation that an issuer's status as an accelerated filer could determine the date of a required transition to IFRS is based on the premise that larger issuers would be better able to allocate resources to the transition to IFRS more quickly than smaller issuers, and a staged transition also may help manage resource demands on auditors, consultants and other market participants. Reliance on the existing definitions of accelerated/large accelerated filer also is expected to facilitate an orderly, predictable transition to IFRS because an issuer would already need to ascertain its status as an accelerated filer for other reporting purposes and allow it to predict when it would be required to adopt IFRS. 74 This predictability may also encourage voluntary movement to IFRS, as an issuer may have an incentive to use IFRS prior to the date the rules would require it to do so if its competitors were already using IFRS. 75 We also recognize, however, that sequencing the transition, while it would avoid some costs associated with all issuers transitioning at once, also would result in some non-comparability of financial information due to application of the IFRS transition provisions at differing dates. Staging the transition by an issuer's size would embed that non-comparability among the issuers within an industry. Further, a staged transition would, temporarily, create a dual system of reporting for U.S. issuers that would require investor familiarity with both IFRS and U.S. GAAP, as described above in Section III.A.5. 74 Exchange Act Rule 12b-2 contains provisions for entering and exiting accelerated filer and large accelerated filer status, including when an issuer must determine its status. 75 In addition, we anticipate that newly public companies, which are non-accelerated filers until after their first year of reporting, would be able to use IFRS prior to a mandatory phase-in date for non-accelerated filers if the Commission decided to adopt a staged or sequenced transition to IFRS as discussed. As part of the Commission's evaluation, it also may consider transition rules to expand the eligibility criteria of those U.S. issuers which could elect to use IFRS in their Commission filings, so that additional U.S. issuers would be able to use IFRS prior to a mandatory transition date. In proceeding along the Roadmap, the Commission would consider the circumstances in which the early use of IFRS would be most appropriate for investor protection and capital formation. Another consideration would be how to address the current choices available to foreign private issuers for their financial reporting in filings with the Commission. Currently, foreign private issuers can choose to prepare their financial statements in accordance with U.S. GAAP, IFRS as issued by the IASB, or another comprehensive set of accounting principles with a reconciliation to U.S. GAAP. B. Other Areas of Consideration The process of incorporating new accounting standards into any financial reporting system naturally varies between jurisdictions and is accomplished gradually. Differences between national accounting standards, including the extent of similarities or differences between financial reporting frameworks and the degree of judgment they require, affect any given jurisdiction's experience with transition to financial reporting that is in accordance with IFRS. In addition, there are many elements forming the infrastructure underpinning a set of accounting standards that keep it current and functioning effectively in a given jurisdiction. Integration considerations related to the use of IFRS in different jurisdictions also are manifested in the different regulatory and legal environments. If the Commission were to require U.S. issuers to report in accordance with IFRS, a number of considerations and actions with a series of lead times may be required for investors, issuers, and other parties that use financial statements or have a role in the capital markets or the financial reporting infrastructure. Some of these considerations are discussed in the remainder of this section. 1. The Roles of Financial Information In addition to filing financial statements with the Commission, U.S. issuers commonly provide financial information to other parties. While the federal securities laws provide the Commission with the authority to prescribe accounting principles and standards to be followed by public companies and other entities that file financial statements with the Commission, the provision and content of information to other parties may not be generally or directly regulated by the Commission. However, changes in the accounting standards used for purposes of preparing financial statements included in filings with the Commission could have an effect on financial reporting by companies to other parties. The following provides examples of circumstances or parties that may be affected. Various federal and state regulators, including regulators of financial institutions, insurance companies and public utilities, are provided with periodic financial information on an on-going basis. For example, U.S. GAAP financial statements frequently are used as the basis for determining capital requirements for financial institutions. Another example of the effect on reporting to others relates to federal and state income taxes. As the Internal Revenue Code has developed over an extended period of time with existing U.S. GAAP as the predominant set of accounting standards used in the United States, certain interactions exist between certain provisions of U.S. GAAP and income tax requirements. For example, the Internal Revenue Code has conformity provisions related to the method of accounting for inventory for tax reporting purposes and the method used for reporting to shareholders (and other owners or beneficiaries) or for credit purposes. 76 IFRS does not allow for the use of the last-in, first-out, or LIFO, method of accounting for inventory. 77 As a result, a company that reports in accordance with IFRS would be required to use a method of accounting for inventory that is acceptable under IFRS, for example the first-in, first-out, or FIFO, method. U.S. issuers changing to FIFO for financial reporting purposes may experience a change in taxable income based on the difference between inventory valued on a LIFO basis and on a FIFO basis. 76 See Section 472 of the Internal Revenue Code. 77 See IAS 2 “Inventories,” paragraph IN63. Many U.S. companies have issued debt securities under indentures or have entered into lending agreements that may contain various covenants based upon financial measurements, such as a stated minimum net worth. Those indentures and agreements, as well as other types of contractual agreements to which issuers may be subject, may require periodic reporting of financial information. These contractual obligations may explicitly require the use of U.S. GAAP in connection with financial covenants or financial reporting. Other contractual obligations may have an assumption about the nature of the accounting model under which such reporting will occur. For a U.S. issuer, it is likely that such requirements are based on how U.S. GAAP would report financial results. Some market indices, such as the S&P 500, currently only include issuers that report financial statements in accordance with U.S. GAAP. IFRS reporting might affect an issuer's ability to be included in such indices or financial instruments based on those indices, exclusion from which may have an adverse effect on these issuers, unless the instruments or indices make any necessary changes to include issuers which report in IFRS. 2. Accounting Systems, Controls and Procedures Use of any new accounting standards requires changes to financial reporting systems and procedures to identify, collect, analyze and report financial information and the corresponding controls. Changing numerous accounting standards at the same time, regardless of the starting point, would require numerous changes in a company's policies and procedures and system of internal controls. Some changes may prove more complicated than others. Systems changes would apply not only to the issuers preparing such statements, but also to various other market participants such as users of financial information and regulators. Some companies that have significant foreign operations may already have familiarity with IFRS. It may not be as difficult for these companies to adopt IFRS for all of their operations for U.S. reporting purposes. There would be additional implications on financial reporting. Two examples of the implications relate to an issuer's equity method investment in another company and initial public offerings. Many issuers hold investments in other entities which are accounted for under the equity method. In order for an issuer to properly record the equity method investment, the issuer would need IFRS-based information about the investee each reporting period. If the investment were in equity of a company using U.S. GAAP for its own financial statement preparation and reporting purposes, obtaining the required IFRS-based information may prove difficult and costly. This would be similar to the situation that exists today if an issuer using U.S. GAAP has an equity investee that uses a different basis of financial reporting. Further, an additional cost and complication would be added to the initial public offering process if a private company whose financial statements were not in accordance with IFRS were required to provide them for purposes of its initial registration statement with the Commission. 3. Auditing Another affected party is the audit firms that are engaged to audit a U.S. issuer's financial statements and to report on the effectiveness of its internal control over financial reporting. This may be particularly challenging for less globally oriented audit firms, which typically may have fewer resources available through affiliated or network firms located in jurisdictions in which issuers already report in accordance with IFRS. This could be a further factor affecting concentration in the auditing profession. Audit firms would need to consider elements of their systems of quality control, such as their practices related to hiring, assigning personnel to engagements, professional development and advancement activities. Some U.S. audit firms already have some experience with conducting audits of financial information prepared in accordance with IFRS, as they may be involved in the audit of the U.S. operations of a foreign company that does so. But because U.S. auditors generally have less experience with IFRS than with U.S. GAAP, in the short term, U.S. audit firms may encounter challenges in establishing policies and procedures, and hiring and training personnel, to provide themselves with reasonable assurance that their personnel would possess knowledge appropriate to perform audits of U.S. issuers. Even with appropriate systems of quality control, however, additional auditing guidance still may be necessary. Additionally, U.S. firms that are members of global audit networks may have already begun to consider systems of quality control to foster the high quality and consistent application in reporting under IFRS across national borders. If U.S. issuers were to report in accordance with IFRS, the U.S. firms of these global audit networks could be affected more than they are presently by the reporting of audit clients of their foreign affiliates and by U.S. subsidiaries of those clients. One consideration for audit firms relates to their ability to issue opinions on IFRS financial statements in accordance with PCAOB standards. For example, one of the conditions under IFRS for recognizing a provision for a legal contingency is that it is more likely than not that an obligation exists. 78 This recognition threshold is lower than the current recognition threshold in U.S. GAAP, resulting in the potential for an earlier income statement recognition of costs associated with litigation. 79 Concerns have been raised about an auditor's ability to corroborate the information furnished by management related to litigation, claims, and assessments by obtaining an audit inquiry letter from a client's attorney. 80 78 See IAS 37, paragraphs 15 and 16. 79 See FAS 5. 80 Some believe that changes to the American Bar Association Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information may be necessary. See AU § 337C. The Statement of Policy, commonly referred to as the “Treaty,” recognizes the professional responsibilities of attorneys and auditors and seeks to preserve confidentiality while providing the necessary level of assurance for the audit. The Treaty recognizes that the confidentiality of communications between an attorney and a client may be impaired by the disclosure of the substance of such communications to third parties, including auditors. By describing thresholds for disclosure and limitations on responses, the Treaty sets the scope of the attorney's responses to audit requests for information on legal matters. Some believe that the thresholds and limitations described in the Treaty are inconsistent with certain provisions within IFRS. We note that references to current U.S. GAAP literature exist in various standards issued by the PCAOB and other accounting or auditing organizations. If IFRS were required for all U.S. issuers, amendments to existing references to U.S. GAAP literature may be appropriate. Certain changes have already begun with respect to IFRS in the U.S. accounting profession. For example, under AICPA rules, a member of the AICPA can only report on financial statements prepared in accordance with standards promulgated by standard setting bodies designated by the AICPA Council. In May 2008, the AICPA's Council voted to designate the IASB in London as an international accounting standard setter for purposes of establishing international financial accounting and reporting principles, and to make related amendments to its rules to provide AICPA members with the option to use IFRS. 81 81 See http://www.aicpa.org/download/info/AICPA_NewsUpdate_Vol.11_No.21.pdf. 4. Considerations of IFRS and the IASB's Standard Setting Process a. State of IFRS As discussed in the 2007 Concept Release, IFRS is not as developed as U.S. GAAP in certain areas. 82 IFRS also is not as prescriptive as U.S. GAAP in certain areas and in certain areas permits a greater amount of options than in U.S. GAAP. 83 The smaller volume of IFRS literature as compared to U.S. GAAP may decrease the amount of authoritative guidance available in a particular circumstance. This relatively lesser amount of guidance and, in some cases, greater optionality in IFRS could reduce comparability of reported financial information, as different issuers may account or provide disclosure for similar transactions or events in different ways but this flexibility also allows a financial statement that may more closely reflect the economics of transactions. As we noted in the 2007 Concept Release, in certain limited areas in which the IASB has yet to develop guidance on particular industry activities in which IFRS permits disparate options, we have noted that the level of diversity has manifested itself in the reporting practices of foreign private issuers. 82 IFRS does not have a specific standard or interpretation on accounting treatment for insurance contracts, extractive activities, certain common control transactions, recapitalization transactions, reorganizations, acquisitions of minority shares not resulting in a change of control and similar transactions. However, there are areas where current U.S. GAAP also does not have a single comprehensive standard or interpretations, such as for revenue recognition or property, plant and equipment. 83 As noted by CIFiR in its Final Report: “From an international perspective, we note that IFRS currently permits numerous alternative accounting policies. While we acknowledge the IASB's efforts in reducing some of these alternative treatments, we nonetheless believe the SEC should encourage the IASB to [...] seek to eliminate alternatives as part of its standards-setting projects.” CIFiR Final Report, at 51. As U.S. GAAP has been used longer and more extensively than IFRS, more U.S. GAAP implementation guidance has developed over time. A variety of factors may have resulted in the accounting profession in the United States becoming more accustomed to relying on a greater degree of detailed accounting guidance, including factors such as seeking consistency and reducing exposure to litigation and liabilities. Such guidance also can affect the outcomes of discussions between management and auditors on the use of a particular accounting treatment. Less prescriptive guidance also may make litigation or enforcement outcomes more difficult to predict. On the other hand, less prescriptive guidance may increase issuers' ability to account for transactions or events in accordance with their underlying economics, which could improve comparability of economically similar situations and highlight differences in dissimilar situations. As CIFiR noted in its final report: Investors are likely to benefit from more emphasis on principles-based standards, since rules-based standards * * * may provide a method, such as through exceptions and bright-line tests, to avoid the accounting objectives underlying the standards. In other words, without the exercise of judgment, rules in the form of bright lines may result in a false consistency—that is, ostensibly uniform accounting for differing fact patterns. If properly implemented, “principles-based” standards should improve the information provided to investors while reducing investor concerns about “financial engineering” by companies using the rules to avoid accounting for the substance of a transaction. 84 84 See CIFiR Final Report, at 88. The Commission and its staff also have supported the increased use of objectives, outcomes and principles in accounting standards in contrast to detailed prescriptive guidance. 85 85 For example, the SEC issued “Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter” Release No. 33-8821 (April 25, 2003), which included numerous recommendations for the FAF and FASB to consider, including greater use of principles-based accounting standards whenever reasonable to do so. The SEC staff also issued “Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System” (July 25, 2003), which further explained the benefits of objectives-oriented standards. In addition, in cases where specific guidance is not available, IFRS encourages disclosure on the accounting policies that the preparer of the financial statements has elected and applied. 86 The same also is generally true where IFRS permits greater optionality. 87 In adopting IFRS, an issuer may find it appropriate to evaluate its disclosure practices, such as the disclosure provided in financial statement footnotes and management's discussion and analysis, to clearly communicate these choices. Further, as we indicated when we adopted changes to accept IFRS financial statements from foreign private issuers without a reconciliation to U.S. GAAP, 88 our staff has indicated that the issues it has observed in its review of IFRS financial statements do not appear to be more pervasive or significant than those it has identified in U.S. GAAP financial statements. 86 In areas for which an IFRS does not exist, IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” requires preparers to use judgment in developing accounting policies such that financial information is provided that, among other things, is relevant to the needs of users and the financial statements reliably reflect the economic substance of transactions. In applying such judgment, preparers must consider other guidance found in IFRS and, if no analogous guidance is found, the definitions, criteria and concepts in the IFRS conceptual framework. Additionally, IAS 8 allows preparers to consider pronouncements of other standard setting bodies if those pronouncements are drawn from a conceptual framework similar to that underlying IFRS, to the extent that such pronouncements do not conflict with IFRS. 87 See IAS 1 “Presentation of Financial Statements,” paragraph 119 for general guidance on disclosure of accounting policies from among alternatives. Certain standards under IFRS specifically require disclosure of selected accounting policies when choices are allowed. See for example IAS 16 “Property, Plant and Equipment,” paragraph 73. 88 See the 2007 Adopting Release. b. Relationship to the Accounting Standard Setting Process A change to commit U.S. reporting to following IFRS would include a change in the relationship of the U.S. capital markets to the accounting standard setting process. The IASB and its related organizations include members from a number of countries. The IASB is expected to be responsive to broad, world-wide constituencies of investors, issuers, regulators and many others in all facets of its work, including the establishment of its agenda and the development of standards. These constituencies can be expected to represent a wide range of interests, reflecting varying economic, social and political environments. These factors likely would mean that the interaction, and potentially the relevance and influence, of U.S. capital market participants, including the Commission and its staff, would be reduced compared to the current standard setting process in the United States. The IASB is expected to consider its world-wide constituencies of investors, issuers, and regulators during the deliberative process for issuing new or revised accounting standards. Further, the IASB has entered into convergence agreements with other national accounting standard setters, such as with the Accounting Standards Board of Japan. 89 Due to the IASB's need to develop standards with a wider variety of constituents in mind, U.S. capital market participants will have a lesser degree of input into the standard setting process including fewer members of the IASB and fewer participants on roundtables and advisory and other groups than they currently have in the U.S. standard setting process. Further, in the U.S. standard setting process, participants from multiple constituencies but in the same geographic market ( i.e. , the United States) are involved. On the IASB, constituencies and geographic market ( i.e. , different countries) participation are commingled. Also, constituents involved in the IFRS standard setting process may come from different financial reporting environments and may have objectives that are different from or not present in the standard setting process for U.S. GAAP. 89 See http://www.iasb.org/News/Press+Releases/The+ASBJ+and+the+IASB+announce+Tokyo+Agreement+on+achieving+convergence+of+accounting+standards+by+2.htm. In addition, individual jurisdictions' processes for incorporating IFRS into their markets may result in varying degrees of pressure placed on the IASB in the development of individual standards. For example, some jurisdictions adopt or endorse IFRS on a standard-by-standard basis unlike the historical approach in the United States to look to a standard setter to establish the body of accounting standards as a whole. Further, the IASB's need to consider a greater number of constituents in seeking consensus on a new or revised standard, and the associated need to consider multiple jurisdictions in scheduling implementation, could lead to a longer deliberative process in issuing accounting standards. Further, individual jurisdictions, through their securities regulators, accounting standard setters or other bodies, could adopt or provide for interpretations or applications of IFRS for companies in those jurisdictions which are different from those in other jurisdictions. The Commission's participation in the oversight of the IASB would principally be through participation in the Monitoring Group proposed by the IASB's governing body, the IASC Foundation. This would be a less direct oversight relationship as to the participation in board and trustee appointments, review of finances, and interaction with the board than the Commission and its staff has currently with respect to the FASB and the Financial Accounting Foundation. 90 90 See FR 70. As noted earlier, this release does not address the method the Commission would use to mandate IFRS for U.S. issuers. In addition, the Commission would retain the ability to take such action as may be appropriate to address financial reporting issues in filings with the Commission. Request for Comment 1. Do commenters agree that U.S. investors, U.S. issuers and U.S. markets would benefit from the development and use of a single set of globally accepted accounting standards? Why or why not? What are commenters' views on the potential for IFRS as issued by the IASB as the single set of globally accepted accounting standards? 2. Do commenters agree that the milestones and considerations described in Section III.A. of this release (“Milestones to be Achieved Leading to the Use of IFRS by U.S. Issuers”) comprise a framework through which the Commission can effectively evaluate whether IFRS financial statements should be used by U.S. issuers in their filings with the Commission? Are any of the proposed milestones not relevant to the Commission's evaluation? Are there any other milestones that the Commission should consider? 3. Do commenters agree with the timing presented by the milestones? Why or why not? In particular, do commenters agree that the Commission should make a determination in 2011 whether to require use of IFRS by U.S. issuers? Should the Commission make a determination earlier or later than 2011? Are there any other timing considerations that the Commission should take into account? 4. What are commenters' views on the mandated use of IFRS by U.S. issuers beginning in 2014, on an either staged-transition or non-staged transition basis? Should the date for mandated use be earlier or later? If the Commission requires the use of IFRS, should it do so on a staged or sequenced basis? If a staged or sequenced basis would be appropriate, what are commenters' views on the types of U.S. issuers that should first be subject to a requirement to file IFRS financial statements and those that should come later in time? Should any sequenced transition be based on the existing definitions of large accelerated filer and accelerated filer? Should the time period between stages be longer than one year, such as two or three years? 5. What do commenters believe would be the effect on convergence if the Commission were to follow the proposed Roadmap or allow certain U.S. issuers to use IFRS as proposed? 6. Is it appropriate to exclude investment companies and other regulated entities filing or furnishing reports with the Commission from the scope of this Roadmap? Should any Roadmap to move to IFRS include these entities within its scope? Should these considerations be a part of the Roadmap? Are there other classes of issuers that should be excluded from present consideration and be addressed separately? 7. Do commenters agree that these matters would affect market participants in the United States as described above? What other matters may affect market participants? Are there other market participants that would be affected by the use by U.S. issuers of IFRS in their Commission filings? If so, who are they and how would they be affected? 8. Would a requirement that U.S. issuers file financial statements prepared in accordance with IFRS have any affect on audit quality, the availability of audit services, or concentration of market share among certain audit firms (such as firms with existing international networks)? Would such a requirement affect the competitive position of some audit firms? If the competitiveness of some firms would be adversely affected, would these effects be disproportionately felt by firms other than the largest firms? 9. What are commenters' views on the IASB's and FASB's joint work plan? Does the work plan serve to promote a single set of high-quality globally accepted accounting standards? Why or why not? 10. How will the Commission's expectation of progress on the IASB's and FASB's joint work plan impact U.S. investors, U.S. issuers, and U.S. markets? What steps should be taken to promote further progress by the two standard setters? 11. The current phase of the IASB's and FASB's joint work plan is scheduled to end in 2011. How should the Commission measure the IASB's and FASB's progress on a going-forward basis? What factors should the Commission evaluate in assessing the IASB's and the FASB's work under the joint work plan? 12. What are investors', U.S. issuers', and other market participants' views on the resolution of the IASB governance and funding issues identified in this release? 13. What steps should the Commission and others take in order to determine whether U.S. investors, U.S. issuers, and other market participants are ready to transition to IFRS? How should the Commission measure the progress of U.S. investors, U.S. issuers, and other market participants in this area? What specific factors should the Commission consider? 14. Are there any other significant issues the Commission should evaluate in assessing whether IFRS is sufficiently comprehensive? 15. Where a standard is absent under IFRS and management must develop and apply an accounting policy (such as described in IAS 8, for example) should the Commission require issuers to provide supplemental disclosures of the accounting policies they have elected and applied, to the extent such disclosures have not been included in the financial statements? IV. Proposal for the Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors A. Eligibility Requirements We are proposing amendments to our rules that would allow certain U.S. issuers that meet specific criteria to file financial statements in accordance with IFRS as issued by the IASB, rather than U.S. GAAP, for use in their annual and other reports made under Section 13(a) or 15(d) of the Exchange Act, 91 proxy statements and information statements under Schedules 14A and 14C under the Exchange Act, 92 as well as in registration statements under the Securities Act and the Exchange Act. 93 The Commission is proposing these amendments for several reasons. Investors may find the financial information provided by eligible issuers who elect to report such information in accordance with IFRS to be more comparable to the financial information of non-U.S. competitors. Permitting some U.S. issuers to report under IFRS may provide assistance in a transition to mandatory financial reporting in accordance with IFRS by creating additional, but manageable, demand for IFRS-related services at this time. The Commission also could learn from investors and the U.S. public capital market participants about their consideration of IFRS financial information from domestic issuers. Further, investors in the industry sectors for which the eligibility requirements are met likely would have familiarity with IFRS given that it is used more than any other financial reporting standard on a global basis. The Commission recognizes that there are many questions relating to permitting some U.S. issuers to report under IFRS, particularly in light of the proposed milestones, and encourages public comment on the proposal and the related alternative proposals concerning what, if any, additional U.S. GAAP information should be provided by electing issuers. 91 15 U.S.C. 78m(a) or 78o(d). Section 13(a) of the Exchange Act requires every issuer of a security registered pursuant to Section 12 of the Exchange Act [15 U.S.C. 78 1 ] to file with the Commission such annual reports and such other reports as the Commission may prescribe. Section 15(d) of the Exchange Act requires each issuer that has filed a registration statement that has become effective pursuant to the Securities Act to file such supplementary and periodic information, documents and reports as may be required pursuant to Section 13 in respect of a security registered pursuant to Section 12, unless the duty to file under Section 15(d) has been suspended for any financial year. 92 17 CFR 240.14a-101 and 17 CFR 240.14c-101. 93 As such, the proposed option would not apply to the filing requirements for other regulatory purposes, such as those of regulated entities such as broker-dealers. In deciding which issuers should be proposed for inclusion in this group, the objective of the Commission was to identify those categories of U.S. issuers for whom the use of IFRS would promote comparability with their significant industry competitors. Since investors frequently make capital allocation decisions among companies within a particular industry sector, 94 the first element of the eligibility criteria relates to the use of IFRS in the issuers' industry. The second element is intended to focus on significant competitors within the industry group, and so requires an identification of the accounting standards used by the largest twenty companies by market capitalization. We believe these are the competitors which are the most likely to be comparable among themselves and most likely to be ready to make the transition to IFRS. Both proposed elements—the prevalence of the use of IFRS and the significance of the issuer in a given industry—would need to be met for a U.S. issuer to be eligible to file its financial statements in accordance with IFRS with the Commission. 94 For example, at the end of 2007, there were 219 exchange-traded funds with an industry/sector-based investment objective, with net assets of approximately $93 billion. 2008 Investment Company Factbook, published by the Investment Company Institute. The industry criterion identifies companies for which we preliminarily believe it would be overall beneficial to investors for the U.S. issuer to be eligible to use IFRS because financial statement comparability with other significant competitors in their industry would be promoted and enhanced. Under this test, an industry would be eligible if IFRS is used as the basis of financial reporting more often than any other basis of financial reporting by the 20 largest listed companies worldwide within that industry as measured by market capitalization. The U.S. issuer would make that determination as follows: (1) An issuer would ascertain its industry group by using the North American Industry Classification System (NAICS) 95 code at the three-digit level, Standard Industrial Classification (SIC) 96 codes at the two-digit level, or the International Standard Industrial Classification (ISIC) 97 codes at the “Division” level. Alternatively, the issuer could use a privately provided, published, and widely accepted industry classification scheme at a similar level of detail, such as the Industry Classification Benchmark (ICB) 98 at the “Sector” level or the Global Industry Classification Standard (GICS) 99 at the “Industry” level. For classifications of individual companies, the issuer must use a single published and widely accepted industry source. (The provider of the classification scheme may be the same entity as the source of classifications of individual companies.) 95 See http://www.census.gov/epcd/www/naics.html. 96 See http://www.census.gov/epcd/www/sic.html. 97 See http://unstats.un.org/unsd/class/family/family2.asp?Cl=27. 98 See http://www.icbenchmark.com/. 99 See http://www.mscibarra.com/products/gics/. (2) Then, the U.S. issuer would determine whether IFRS is used as the basis of financial reporting more than any other basis of financial reporting by the 20 largest listed companies worldwide within its industry. a. An issuer would do this by first identifying the 20 largest listed companies globally in its industry by market capitalization. 100 For the purposes of this calculation, market capitalization should be determined as of the same day within the 180 days preceding the date on which the SEC staff receives a request for a letter of no objection (as described below). Market capitalization would need to be determined from a widely accepted source. 100 For these purposes, market capitalization refers to the worldwide market value of a company's outstanding voting and non-voting common equity securities. b. Next, the U.S. issuer would ascertain which accounting standards each of the 20 companies uses to report its financial results to the public capital markets. Companies within the industry are considered to report under a specified set of accounting standards if they have published audited annual financial statements under those accounting standards. 101 As described below, a U.S. company that elects to report using IFRS would be required to file financial statements prepared in accordance with IFRS as issued by the IASB. 101 For purposes of the calculation, companies reporting under more than one set of standards can be counted as using any of these standards. If the U.S. issuer were among the 20 largest companies globally in a particular industry and IFRS is used as the basis of financial reporting more often than any other basis of financial reporting among the 20 largest listed companies worldwide in that industry, then the U.S. issuer would be eligible to elect to use IFRS in its filings with the Commission. To illustrate, if among the top 20 companies in a given industry, there were 8 companies using IFRS, 7 using U.S. GAAP and 5 using other bases of financial reporting, the industry would be viewed as an “IFRS industry” and the 7 U.S. companies would be eligible to change to IFRS. 102 If among the top 20 companies there were 4 using IFRS, 3 using U.S. GAAP and 13 using other bases of financial reporting but no single other basis accounted for more then 3, the industry would be viewed as an IFRS industry. In contrast, if among the top 20 companies there were 7 using IFRS, 7 using U.S. GAAP and 6 using other bases of financial reporting, the industry would not be considered an IFRS industry. If there were 8 companies using U.S. GAAP, 7 using IFRS and 5 using other bases of financial reporting, then the industry also would not be an IFRS industry and the U.S. companies would not be eligible to use IFRS. 102 The distribution of size among the top 20 companies would not matter. In other words, there would be no requirement that the group of companies using a given set of accounting principles, such as IFRS, would constitute the largest percentage by market capitalization within the industry or in comparison to other groups of countries using other sets of accounting principles. The only criterion would be that the number of companies using IFRS was more than the number of companies using any other basis of financial reporting. Using one of the industry classification systems (SIC codes), we estimate that at present a minimum of approximately 110 U.S. issuers in 34 “IFRS industries” would be eligible to receive a letter of no objection from the staff using the proposed criteria. 103 Our estimate contains a number of assumptions and may be impacted by some data not being readily available, as indicated below. Further, certain factors could result in the number of eligible issuers becoming higher, although this availability is most likely to occur in periods beyond 2011 when the Commission would expect to make its decision on IFRS implementation under the Roadmap. 104 103 For example, under the methodology described in this section, metal mining under SIC code 10 and conglomerates under SIC code 99 may be eligible. 104 The number of eligible companies at the outset could be higher due to the fact that different industry classification systems would be available to determine eligibility. This could affect the number of U.S. issuers that would be ranked among the 20 largest in their industry by market capitalization, because companies may be eligible to use IFRS under one classification system, but not another. In addition, if companies in an industry that is eligible under one classification system switch to IFRS, this action may result in IFRS being used more often than any other set of standards within a separate industry, under a different classification system. This effect could result in an expansion of IFRS industries as U.S. companies switch to IFRS, and, in turn, an increase in eligible U.S. companies. In addition, under the proposed eligibility criteria, as more countries change to IFRS, more industries may become “IFRS industries,” and more U.S. companies would become eligible to file IFRS financial statements. For example, assuming that Brazil, Canada, Chile and South Korea follow IFRS, the number of IFRS industries increases by 9 and total number of eligible U.S. companies under our methodology would increase to approximately 160, representing approximately 23% of the market capitalization in the United States. Also, to the extent the mix of competitors by market capitalization changes to include more competitors that report in IFRS, additional industries may qualify as IFRS industries over time. We estimate that, if all 74 industries under our methodology were IFRS industries the theoretical maximum number of U.S. issuers that could be eligible given the present assumptions of companies in the top 20 by industry would be approximately 380, representing 57% of the market capitalization in the United States. The potential impact of this dynamic is limited, however, by the fact that the Roadmap anticipates a decision by the Commission on the use of IFRS by 2011. Eligibility would likely expand for other reasons. For example, relatively young foreign public equity markets, particularly in emerging markets, are developing at a faster rate than the mature U.S. equity market, resulting in greater representation of large foreign companies on equity exchanges. This factor may result in an increase in the number of IFRS-using listed companies in the top 20 of each industry, by market capitalization, and a corresponding increase in eligible industries. To develop our estimate of the potentially eligible issuers, our staff obtained data from publicly available sources on the 20 largest listed companies measured by market capitalization in each industry, using two-digit SIC industry classification codes as assigned by Standard and Poors' COMPUSTAT. 105 We did not estimate what the population of eligible issuers would be under other industry classification methods available under this proposed rule. Therefore, our estimate represents a lower bound on the number of U.S. issuers at present that we believe may be eligible to adopt IFRS under this proposed rule. 105 There are 74 industry groups under this classification approach. For some industries, there were less than 20 companies available under the data obtained. Our staff kept these industries in its population applying the test of whether IFRS was used more than any other basis of reporting among the available list of companies in that industry. To simplify the analysis, the staff relied on a number of assumptions regarding the bases of accounting of the companies in the estimated population. In evaluating what bases of financial reporting were used by the companies within this estimated population, our staff assumed that all U.S. entities were registered with the Commission and therefore reporting under U.S. GAAP. In addition, the staff assumed that any company from an E.U. country, Australia, New Zealand, South Africa or Switzerland was reporting under IFRS. For other companies, our staff attempted to obtain information on the set of accounting standards used. For purposes of this analysis, an assumption was made that any assertion as to the use of IFRS, such as on the issuer's Web site, in the issuer's financial statements or in the audit report, was considered as reporting under IFRS. In some cases, our staff was not able to obtain sufficient information about the basis of financial reporting used. For example, published financial statements could not be readily located for all companies and for others financial statements were not readily available in English. Because of this and other limitations, the staff's estimate is an approximate minimum number of issuers that would currently be eligible under the proposed rule, and the actual number could be significantly greater. Based on these assumptions, approximately 34 of the 74 industries identified would be “IFRS industries.” The minimum of approximately 110 U.S. issuers that we estimate presently would be eligible to file IFRS financial statements had as of December 2007 a total market capitalization of $2.5 trillion, which represented approximately 12% of the total U.S. market capitalization. 106 The market capitalization of these eligible companies range from approximately $250 million to $300 billion, with a mean of $23 billion and a median of $8.3 billion. Approximately 94% of these eligible issuers would have a worldwide market capitalization over $700 million. 106 Based on an estimated U.S. market capitalization of $20 trillion. See http://www.world-exchanges.org/WFE/home.asp?menu=395. B. Staff Letter of No Objection to the Use of IFRS To be able to use IFRS financial statements in filings with the Commission, the U.S. issuer would need to obtain a letter of no objection from the SEC staff. This process would assist U.S. issuers in determining whether they would be eligible to switch to IFRS financial statements and provide them with greater certainty before they undertake the complex process of converting their financial statements from U.S. GAAP to IFRS. In addition, through our postings of these letters on our Web site, we would provide information to investors and others about the possibility of the issuer filing reports using IFRS. Obtaining a staff no-objection letter would not commit the issuer to use IFRS. As noted later, such a letter would provide an issuer with the ability to commence filing reports using IFRS for a period of three years from the date of the staff response. To obtain such a letter, the issuer would make a submission to the staff of the Division of Corporation Finance's Office of Chief Accountant. 107 In that submission, the issuer would describe its analysis in determining its eligibility to use IFRS. 108 In preparing a request for a staff letter of no objection to the use of IFRS, we would expect U.S. issuers to undertake reasonable efforts to determine the sets of accounting standards for all companies that comprise the twenty largest in its industry group. If the staff has no objections to the issuer's conclusion that it is eligible to file IFRS financial statements, the staff would issue a letter of no objection. When issued, the staff letter would be made publicly available on the Commission Web site, together with the issuer's incoming submission. The incoming submission from the issuer would not be made public on the Commission Web site if the staff did not issue a letter of no objection. A U.S. issuer could file IFRS financial statements only if it received a letter of no objection. Once the staff issued a letter of no objection, the issuer could adopt IFRS at any time during the three-year period following issuance of the letter without the criteria being recalculated with more current data. 109 The company would also disclose in its first filing using IFRS the date that it submitted its request to the staff demonstrating that it met the criteria and the date the staff issued its letter of no objection. 107 To the extent applicable, an applicant could invoke Rule 83. 108 To the extent an issuer's analysis includes companies whose financial statements are prepared under a jurisdictional version of IFRS or as to which it is not clear whether the financial statements are prepared under IFRS as issued by the IASB, the issuer should state that no information came to its attention from the content of the financial statements of the companies analyzed or otherwise that causes it to believe that the financial statements are not in accordance with IFRS as issued by the IASB. 109 If we were to adopt the proposal, once a U.S. issuer commenced filing reports using IFRS under these rules, it would not have to recalculate its eligibility using more current data. A recalculation and a new staff letter of no objection would be necessary only if the issuer did not commence filing reports using IFRS within three years of receipt of the letter. The proposed definition of “IFRS Issuer” in Rule 1-02(cc) of Regulation S-X, which contains the eligibility criteria that must be demonstrated in the issuer's request to the staff of the Commission, specifically excludes investment companies; employee stock purchase, savings and similar plans; and smaller reporting companies. 110 We have excluded smaller reporting companies from the proposed definition of IFRS issuer as a limitation on the number of issuers that would be eligible to file IFRS financial statements under the proposed rules. Investment companies are proposed to be excluded because of the separate regulatory requirements that exist for those entities. Employee stock purchase, savings and similar plans are proposed to be excluded because they are special investment entities that are subject to tailored accounting practices. 110 The term “smaller reporting company” is defined in Exchange Act Rule 12b-2 [17 CFR 240.12b-2] and in Securities Act Rule 405 [17 CFR 230.405]. Request for Comment 16. Do commenters agree that certain U.S. issuers should have the alternative to report using IFRS prior to 2011? What circumstances should the Commission evaluate in order to assess the effects of early adoption on comparability of industry financial reporting to investors? 17. Do commenters agree with the proposed criteria by which the comparability of an industry's financial reporting would be assessed? If not, what should the criteria be? 18. Which eligible U.S. issuers have the incentive to avail themselves of the proposed amendments, if adopted? Are there reasons for which an issuer that is in a position to file IFRS financial statements under the proposed amendments would elect not to do so? If so, what are they? 19. Is limiting the proposal to the largest 20 competitors by market capitalization an appropriate criterion? Should it be higher or lower? Should additional U.S. issuers be eligible to elect to report in IFRS if some minimum threshold of U.S. issuers (based on the actual number or market capitalization of U.S. issuers choosing to report in IFRS) elects to report in IFRS under the eligibility requirements proposed? To the extent additional U.S. issuers are not permitted to report in IFRS even if such a minimum threshold is met, are such non-eligible U.S. issuers placed at a competitive disadvantage vis-à-vis U.S. issuers reporting in IFRS? 20. Would the use of different industry classification schemes as proposed be unclear or create confusion in determining whether an issuer is IFRS eligible? Should we require that all issuers use a single industry classification scheme? Why or why not? 21. What impact will the Commission's determination to allow an industry to qualify as an “IFRS industry” without majority IFRS use have on the Commission's objective of promoting comparability for U.S. investors? How will this impact U.S. investors, U.S. issuers, and U.S. markets? Is the use of IFRS more than any other set of financial reporting standards the right criterion? Should it be higher or lower? 22. Should the Commission permit additional industries to qualify as IFRS industries, and thus additional U.S. issuers to become early adopters, as more countries outside the U.S. adopt IFRS? Alternatively, should the group of potential industries and early adopters be limited to those that qualify at the time the Commission determines to permit early adoption? 23. Do commenters have any suggestions about the procedural aspects of the proposed eligibility requirements, e.g. , the procedure for obtaining a letter of no objection from the Commission staff or the minimum contents of the required submission? Is such a procedure necessary? Do commenters agree that such a procedure would assist both issuers and investors? Should the procedural aspects of the proposed eligibility requirements be less formal? Should the procedure be similar to that in the no action letter process regarding shareholder proposals under Rule 14a-8 of the Exchange Act? Should the letter of no objection be advisory only? Should obtaining a letter of no objection be optional? Is the method for calculating eligibility clear and appropriate or are there alternative suggestions that should be considered? Should the Commission publish standards or criteria to guide the staff's determination? What do commenters believe the respective role of the Commission and its staff should be in making these eligibility determinations? Should the Commission post on its Web site all submissions and responses, including those for which the staff does not issue a no-objection letter? 24. Currently, some public companies in the U.S. public capital market report in accordance with IFRS and others in accordance with U.S. GAAP. Today, however, this ability to report using IFRS exists only for foreign companies. What consequences, opportunities or challenges would be created, and for whom, of extending the option to use IFRS to a limited number of U.S. companies based on the criterion of improving the comparability of financial reporting for investors? 25. Do commenters agree that the criterion of enhanced comparability is the correct one? Are there other criteria that should be used? For example, should issuers be eligible [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE8-27559. Public record. Not legal advice.